New.Economy@Old.Constitution
by Lawrence A. Hunter, George Pieler on 03/20/2000
28 Pages
As the 21st Century dawns, few people doubt that something fundamental has changed in the American economy. The new economy is being fueled by a revolution in information technology and networking—the Internet. Today, more than 100 million American adults are using the Internet, and email already outnumbers regular mail by a ratio of 10 to 1.
The amount of commerce being conducted over the Internet is growing exponentially. Internet economy revenue should reach $1.2 trillion by 2002, rivaling health care as the nation’s largest industrial sector. Forrester Research predicts that by the year 2003, a minimum of $1.8 trillion worth of business transactions will occur online.
Ronald Reagan characterized politicians’ natural predisposition as, “ if it moves, tax it; if it keeps moving, regulate it; and if it stops moving, subsidize it.” The Reagan dictum still holds, it seems, even if “ it” moves in data packets at the speed of light. Today politicians at virtually every level of government are looking for ways to tax the Internet.
At the federal level, the Internet provides a rich new tax base to which federal politicians would like to gain access, and a number of new “tax handles” to use to manipulate the American economy as they see fit. At the state level, the Internet provides a novel new means of overturning constitutional limits on state taxing authority that have long irritated state politicians. But even more fundamentally, the Internet has revived an age-old struggle between those who believe in political diversity, decentralization and tax competition among the states and those who would replace it with tax coordination and uniformity among the states.
Clearly, the reality is much more complex than a choice between making the Internet a “level playing field” and making it a “tax-free zone.” For one thing, we must draw a distinction between constitutional and unconstitutional methods of taxing the Internet. Of course, everyone assents to the proposition that there should be no unconstitutional taxes on the Internet. But there is considerable disagreement about what is or is not constitutional.
Due Process constraints on state taxation means that the taxpayer must have some sort of physical presence in a state in order to be subject to its taxing authority. And while the standard of Due Process has been loosened by the courts, it hasn’t been erased. And the Internet raises entirely new questions about “presence.”
The Commerce Clause is the primary source of federal power over state and local taxation that involves cross-border issues, so its relevance to Internet issues is obvious. Less obvious, however, is the Confederation or Compact Clause, which sets the boundaries of what states can do collectively without requiring congressional approval. And while the Compact Clause normally prompts recollection of the Confederate States of America, cannot an Electronic Confederation be envisioned, where states enter into a compact to harmonize their policies on taxation, privacy, censorship, residency, voting standards, and the like, all geared to “residents” of cyberspace? Such collusion between states would cause a clear constitutional test.
The Madisonian model of government, as laid out in The Federalist Papers, is a model of competition, not collusion; friction, not harmony; a calculated division of power, not unification across all levels of government. The Internet is the most dramatic example yet of the power of markets, unencumbered by heavy-handed government intervention, to make the world a better place. How policy makers respond to the challenge of electronic commerce will help determine not only the future of the Internet, but also the continued relevance of constitutional governance.
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